Is an Adjustable-Rate Mortgage Right for You?

Home Ownership

Like most financial products, mortgages are not one-size-fits-all. Your specific circumstances dictate what mortgage product is right for you.

In this blog, we will look more closely at adjustable-rate mortgages (commonly referred to as ARMs), explore how they work, and determine when an ARM is the right choice for you.

What is an Adjustable-Rate Mortgage?

To start, we need to define ARMs.

Many standard mortgages are considered “fixed rate.” For example, 30-year conventional mortgages or FHA Loans both feature fixed rates. When a loan has a fixed rate, the interest rate will not change (unless you intentionally take action to change it; for example, refinancing a home loan when the interest rates go down).

If you take a 30-year, fixed-rate conventional mortgage with an annual percentage rate (APR) of 5.50%, that rate will not go up or down for the full 30 years.

ARMs work differently. As their name implies, the interest rate on an ARM can change (or “adjust”) after a certain period. ARMs are defined by two periods: the fixed period and the adjustment period. When you look at ARM rates, you will see the various options listed as 3/3, 5/3, and 7/3.

In these examples, the first number indicates the number of years in which the introductory rate will not change. The second number indicates, in years, how often the rate will adjust after the introductory period.

So, using a 5/3 ARM as an example, you would have a fixed, introductory rate for five years. After the fifth year, the rate would adjust every three years based on general market conditions, plus any margins added by the lender.

The rate adjustment might mean a higher rate – but your rate could also drop, depending on the market. ARMs usually feature periodic and lifetime rate caps, which can limit how much an interest rate can vary both periodically and over the life of the loan.

Should you consider an ARM?

Now that you have a better idea of how adjustable-rate mortgages work, we’ll discuss a few scenarios when an ARM might make sense.

Homebuyers tend to favor fixed-rate mortgages, and for good reason. However, there are also times when an ARM could be a better choice.

You see, the introductory rate that an ARM will carry during its “fixed” period is generally considerably lower than the rate of fixed loans. That lower interest rate means lower monthly mortgage payments and thousands in savings on interest costs during the first few years of the loan. (See our rate tables to compare the difference between fixed-rate and ARM mortgages.)

If you are considering mortgage products, here are a few scenarios where it may make sense to consider an ARM.

  • You plan to purchase, renovate, and resell. Buying a home to renovate and resell? Because you won’t own the home long, why not take advantage of the savings on interest for the time you do own?
  • You move frequently. Some buyers know that, due to their careers or other circumstances, they won’t be in a home for more than a few years. An ARM can be a smart alternative to renting, as you get to build equity while you own, but you save money on interest versus a fixed-rate mortgage.
  • You plan to pay off the mortgage soon. Perhaps you know you have a lump sum coming your way that will allow you to pay off the remainder of your mortgage loan. An ARM can be a good way to save on interest, provided you can pay off the balance during the fixed-rate period.

A consideration worth noting: no one can predict with absolute certainty where the housing market will go; keep in mind that there is no way to know where the market will be in three or five years when you plan to sell.

Considering a mortgage? Think an ARM might be the right choice?

Like all real estate loans, there are a lot of complexities and considerations to sort through as you decide. Connexus offers a variety of ARMs and fixed-rate Mortgage options to meet different needs. We also have a team of experts who understand each product’s complexities and who can help you choose the right option for you and your family.

Learn more about our Mortgages, see our competitive rates, or schedule a phone call with a team member to learn more about our ARMs now.